Truck maker Volvo rides demand boom but supply chain feels strain

STOCKHOLM (Reuters) - Truck maker AB Volvo (VOLVb.ST) beat first-quarter expectations thanks to strong demand for trucks and construction equipment across most markets but cautioned that its supply chain was coming under pressure.

FILE PHOTO: Visitors surround a Volvo FH16 truck at the booth of Swedish truck maker Volvo at the IAA truck show in Hanover, September 22, 2016. REUTERS/Fabian Bimmer/File Photo

Sweden’s Volvo and German competitors Daimler (DAIGn.DE) and Volkswagen (VOWG_p.DE) are enjoying brisk business as fleet buyers step up purchases during what many analysts expect to be the peak year of the current demand cycle.

The flipside of strong demand was higher transport costs and increased spending on staff working overtime to complete orders.

The first major European major truck maker to report on the quarter, Volvo raised its guidance for the North American and Indian heavy-duty truck market as well as for construction equipment in nearly all markets.

Operating profit at the group, which makes trucks, construction equipment, buses and engines, rose to 8.30 billion crowns ($976 million) from 6.83 billion and topped the 8.17 billion expected by analysts in a Reuters poll.

“The operating profit is better than expected, but if you look for weaknesses the margin is below forecast,” Handelsbanken Capital Markets analyst Hampus Engellau said.

“This should be weighed against an extremely strong order intake, and they also raised their outlook for trucks in North America, and for all construction gear markets save Europe.”

Volvo shares, which have outpaced both sector and Swedish blue chip indices over the past year with a 17 percent gain, were down 3.9 percent on the day by 0842 GMT.

SIGNS OF STRAIN

Bolstered by a completed 10 billion crown cost-cutting scheme, Volvo has seen its profitability and share price climb over the past year, raising market expectations.

Its operating margin rose to 9.3 percent from 8.9 percent, but fell shy of the 9.5 percent seen by analysts as rising costs dented profitability in its trucks business.

“Looking ahead, the strong order intake means that the supply chain constraints and associated higher costs will remain in the near-term,” Chief Executive Martin Lundstedt said in a statement.

Chief Financial Officer Jan Gurander said Volvo was grappling mainly with bottlenecks for powertrains - engines, axles and gearboxes - while the upturn across many manufacturing industries left forged and cast materials in high demand.

The high rate of deliveries to meet booming demand also forced it to use more speedy transport, sometimes by air, at a steep cost. Shipment delays yielded additional expenses.

“We get late incoming materials ... which means that we have to have extra shifts in the weekend to complete trucks, and so on,” he told a news conference.

The Gothenburg-based manufacturer said order intake of trucks, which sells under brands Volvo, Mack, Renault and UD Trucks, grew 29 percent, beating the 21 percent rise seen by analysts.

GEELY DEAL

While the demand outlook could hardly be rosier, Volvo’s future ownership and strategy is in greater doubt.

Chinese carmaker Geely’s purchase of shares in Daimler and a yet-to-be closed deal for a stake in AB Volvo has left the rivals facing the unsettling prospect of having the same major owner.

FILE PHOTO: A visitors looks at a Volvo D16 engine at the booth of Swedish truck maker Volvo at the IAA truck show in Hanover, September 22, 2016. REUTERS/Fabian Bimmer/File Photo

For Geely Chairman Li Shufu, whose Zhejiang Geely Holding already owns Swedish automaker Volvo Car Group, the deals seem intended to drive cooperation between companies in which it is an owner, though what it means in practice remains in doubt.

“Our view is that potential partnerships that fulfil all legal and regulatory requirements, and which are mutually beneficial, should always be discussed,” Li wrote in a rare article published in Swedish and German media this month.

AB Volvo’s top executive and chairman voiced cautious optimism regarding the likely Geely ownership at the group’s annual shareholders’ meeting this month, but also showed some surprise at the deal to buy activist fund Cevian’s stake.